Question

The following is a list of prices for zero-coupon bonds of various maturities. a. Calculate the yield to maturity for a bond with a maturity of (i) one year; (ii) two years; (iii) three years; (iv) four years. (Do not round intermediate calculations. Round your answers to two decimal places.) Maturity (Years) YTM Price of Bond $ 955.00 901.47 حج | ده | م 838.62 $ 779.89

Answer 1

​

Face Value YTM = 1 V Present Value - 1

​​where:

n = number of years to maturity

Face value = bond’s maturity value or par value

Present value = the bond’s price today​

i) maturity = 1 year, present value = $955

YTM = (1000/955) - 1 = 0.0471 = 4.71%

ii) maturity = 2 years, present value = $901.47

YTM = square root(1000/901.47) - 1 = 0.0532 = 5.32%

iii) maturity = 3 years, present value = $838.62

YTM = cube root(1000/838.62) - 1 = 0.0604 = 6.04%

iv) maturity = 4 years, present value = $779.89

YTM = 4th root(1000/779.89) - 1 = 0.0641 = 6.41%

note: above formula can be used only in case of bond having no coupon payments.